Watch stocks you care about

In late August, Amgen agreed to buy Onyx Pharmaceuticals in one of the worst-kept M&A secrets of the year. Amgen paid 50% more than Onyx's pre-rumor trading price, suggesting there may be other biotech companies similarly undervalued. Seattle Genetics (NASDAQ: SGEN) , a biotech collaborating with some of the largest drug companies on cancer research, may be on that list.

Biotechnology is one of the most M&A-friendly industriesThe cost to develop and the failure rate of new drugs are high. Because of this, fledgling biotechs often turn to venture capital and partner with major drug companies to finance development

Seattle Genetics currently has just one drug on the market, Adcetris, which was approved in 2011 to treat Hodgkin's lymphoma and anaplastic large-cell lymphoma. The drug serves as a showcase for the company's antibody-drug conjugates, or ADCs -- complex molecules delivering payloads directly to cancerous cells without the collateral damage associated with traditional chemotherapy.

As a result of Adcetris winning 70% of the market share for its approved indications, major drug companies including Bayer, Roche's Genentech, Takeda's Millennium, AbbVie (NYSE: ABBV) , and Pfizer (NYSE: PFE) have inked lucrative deals with Seattle Genetics to gain access to its ADC portfolio.

Those deals mean big money for Seattle Genetics, totaling as much as $3.5 billion in future milestone payments plus royalties from any drugs that become commercialized.

Seattle Genetics' big plans for AdcetrisAdcetris was the first new Hodgkin's treatment approved in 30 years when it got the nod from the FDA in 2011. The drug has generated nearly $70 million in revenue in the first half of this year , and the company hopes it can build a billion-dollar franchise around the drug by expanding its label.

As part of that goal, Seattle Genetics is in phase 2 trials for Adcetris as a front line treatment for large B-cell lymphoma and is currently in phase 3 trials studying Adcetris as a replacement for Bleomycin in the most common chemotherapy cocktail used in lymphoma patients. The company is also studying Adcetris as a stand-alone first line treatment for Hodgkin's as well. If successful, an expanding patient pool could move Adcetris closer to $1 billion blockbuster status and that could prove intriguing to many of Seattle Genetics' big pharma partners.

Catching the eye of the biggest drugmakersSeattle is currently working with cancer research powerhouse Genentech on nine different programs. Those programs include ADC research targeting ovarian and prostate cancer, from which positive early stage data was presented at ASCO this past summer. If those early successes continue, Seattle Genetics could earn up to $900 million in milestones from Genentech, as well as future royalties.

Seattle Genetics also has two ADC trials ongoing with AbbVie -- the drug company spun off from Abbott Labs earlier this year. AbbVie expanded its relationship with Seattle Genetics last fall in order to gain access to its auristatins, paying $25 million in upfront fees, offering milestone payments of up to $220 million per target, and royalties equal to mid-to-high single-digit percentages of commercialized drugs.

Not to be left out, Pfizer is also conducting research using Seattle Genetics' ADCs, inking a deal in 2011 that could be worth as much as $200 million in milestone payments. Pfizer also agreed to a collaboration deal with Seattle Genetics' ADC competitor CytomX Therapeutics worth more than $600 million this past June.

Bayer, another long-term Seattle Genetics partner, signed a deal for access to Seattle Genetics' auristatin-based ADC technology this past June. Bayer agreed to pay Seattle Genetics $20 million up front, with up to $500 million in milestone payments, as well as future royalties.

"Antibody-drug conjugates are one of our focus areas in oncology research and we are looking forward to strengthening our portfolio in this area of personalized medicine through the collaboration with Seattle Genetics," Bayer's Head of Global Drug Discovery Andreas Busch said in June.

Of course, this only matters if drugs make it to marketSo far, Adcetris' success -- the drug generated nearly $70 million in sales in the first six months -- and confidence exhibited by major pharmaceuticals has produced mixed financial results. The company lost $6.9 million, or $0.06 per share, in the second quarter. That loss was far better than the $17 million it lost a year ago, and results did outpace Wall Street analysts who were looking for a $0.18 per share loss. Still, losses are losses.

Overall, high-profile and deep-pocketed collaborators offer a who's who of potential acquirers, all of whom might someday want to lock up the technology and competitors royalties. The big "if" surrounding any future deal remains success, however. For Seattle Genetics to be truly worth acquiring, additional drugs powered by the company's ADCs will need to make their way through clinical trials to pharmacy storerooms.

Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Sending report...

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.
Follow @ebcapital